Liquidity refers to how easy and quick it is to buy or sell an asset in the market without changing its price too much. When it comes to regular finance, cash is the most liquid asset because you can use it right away. In traditional finance, millions of shares of blue-chip stocks are bought and sold on the market. This makes it easy for a seller to sell the stock for a price that is close to what it is worth on the market right now. This results in the stock having high liquidity. Real estate, on the other hand, is not liquid because it’s hard to sell right away, and the price can change depending on other factors.
In cryptocurrency, liquidity works the same way, but it is important to track it because of the high volatility. Coins with high liquidity, like Bitcoin and Ethereum, are traded in large amounts on exchanges. This makes it easy to buy or sell a lot of things with little change in price. But this isn’t true for smaller altcoins, which are less liquid because there aren’t as many buyers and sellers. So, if someone buys or sells a lot of an altcoin, any large trade in an altcoin could cause the price to swing wildly.
A good amount of liquidity makes trading safer. In DeFi, liquidity pools enable individuals to deposit their assets, facilitating easier trading for others, while also allowing them to earn rewards in return.
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